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Italian reforms: The naysayers are at it again, but they are wrong.

This time, I will entirely borrow from a person I trust and consider highly. Erik F Nielsen is Unicredit’s Global Chief Economist, someone whose vision and insight has proven super valid in many different instances.

Here’s a short and punchy excerpt, from his most recent “Sunday Wrap”

…the Italian growth story is different from – and considerably more complex than – the other big Eurozone countries. Italians who work (but too many don’t) put in plenty of hours, indeed broadly at par with the US and Japan, but they produce less per hour worked than the US, Germany and France – although considerably more than what’s produced per hour in the UK (and Japan), so its far from hopeless.

I am not going to write here the entire prescription for why that is so, but just note that to fix it and to transform Italy into a modern and globally competitive economy, a comprehensive reform agenda is needed – and that the Renzi government is on the case, rolling out an impressive set of reforms.

Part of the popular media and many of the commentariat continue to seem confused, or to demand unreasonably fast implementation. Let me just highlight two areas which receive a lot of attention right now, and where I think a lot of people don’t get it, namely labor market reforms and tax compliance:

First, on Thursday, the Italian government agreed to PD backbenchers’ demand that the change to the infamous Article 18 (that you cannot be fired for discriminatory or unjust disciplinary reason) will be formalized with an explicit amendment to the enabling laws for the incoming single Job Act. This “concession” led the usual gang of naysayers to suggest that Italian labor reforms have been watered down to a meaningless level. Never missing an interesting twist to the news, Euro-Intelligence claimed that “Renzi makes another important concession to the PD rebels in the debate on labor reforms”.

With all respect, I think this interpretation is nuts. If you disagree and see this change as a troublesome concession, I suggest that you remind yourself of the countries in the world that allow dismissal of workers based on discrimination or as an unjust disciplinary action – and maybe consider whether those are countries you’d like to live in – or invest in.

Second, with the Renzi government’s recent high-profile crackdown on tax cheaters, you hear a lot of nonsense about tax compliance and Italy’s supposed inability to collect revenues, which then – supposedly – is a cause of fiscal problems.

So, let’s set the record straight: On IMF data, the Italian (general) government collected 51.5% of GDP in revenues last year, which compares with, e.g. 44.7% in Germany, and 49.7% in Austria – and, not to put a too fine print on it, 33.7% in Ireland and 43.6% in Luxembourg, both presently under investigation for having agreed to competition-distorting tax cuts for companies, or 44.4% in the Netherlands, presently under investigation for allowing Starbucks strangely high write-offs for the risk associated with their coffee roasting operations (call me if you want to hear my view on the real issue with Starbucks roasting technique!)

My point is this: Italy has no problem collecting taxes; if anything, it collects too much, not too little, from the economy. The problem lies with the difference between what should be paid, according to the law (and by whom), and what actually is being paid – and by whom. In other words, it’s about fairness, and the possibility of lowering tax rates on the economy as a whole, if everyone pays what they are supposed to pay. Raising the tax compliance ratio without cutting other taxes would imply another fiscal tightening, which is hardly what Italy needs now.

Of course, making society comply with the law also requires a well functioning judiciary system, which is another Italian weakness – and another area where the Renzi government is making good progress.

Rome wasn’t built in one day – but once it was done, man, what a beautiful place it was…